A Way Out of the Mess?

Despite surging prosperity, the nation and the economy are drifting through soggy, somber summer doldrums. Inflation appears ready to bulge as soon as the price freeze is lifted. Food shortages loom, the possibility of recession builds, and the ailing dollar bumps from crisis to crisis overseas. Still, outright recession can be avoided in 1974 if the Nixon Administration can enforce a strong, credible anti-inflation policy to get out of the mess that its erratic management of the economy helped to create.

Last week, in a flurry of top-level economic policy meetings, the Administration was striving toward that end. Plans for Phase IV controls were all but completed, and probably will be announced this week or next. According to Treasury Secretary George Shultz, the new program will be designed to hold down as much as possible the inevitable jump in prices that will follow the end of the freeze.

On paper, Phase IV looks tough. Profit margins will not be allowed to rise as much as in the largely voluntary and ineffective Phase III. Big companies will have to get prior approval from the Cost of Living Council for all price increases. The raises probably will be measured against the prices that existed in early January, when Phase III started. Companies will not be permitted to increase prices to make up for increases in production costs that occurred before the January "base period." To further slow price spirals, companies in some instances might have to make their increases in steps instead of all at once. Export restraints will have to be continued for a time, says Shultz, or else foreigners will rush to empty U.S. granaries. Shultz, who dislikes controls, revealed that the Administration would like to remove all of them by year's end.

Forced Savings Plan. Budget Director Roy Ash also disclosed that the Administration is considering raising taxes to "brake inflation and restore foreign confidence in the dollar." Among the measures being weighed: an increase in gasoline levies and a "horsepower" tax that would fall heaviest on big, gas-thirsty cars. Most experts regard a tax boost now as ill-timed, especially when the 1974 budget is sliding into balance and the economy's growth is slowing. One idea gaining support among economists is a "forced savings" plan to stabilize demand. Firms and individuals would be required to pay a part of their after-tax income to the Government in prosperous times; the money would be returned, perhaps with interest, when the economy needed stimulus.

Above all, the Government's success in quelling inflation will depend on slowing the rocketing price of food. The surest way to achieve that is to increase supplies. The Agriculture Department reported that the prospects are good for a bumper crop this year, particularly for such basic livestock feeds as corn and soybeans. Even so, the rate of price increases in the supermarkets is not likely to taper off until next year, and then only if supply really catches up with swelling demand.

Food prices for the rest of this year are expected to go on inflating at an annual rate of close to 8%. Phase IV will most likely permit food processors, wholesalers and retailers to pass on to consumers the increases that are paid to farmers for raw materials, which are exempt from controls. But companies probably will not be allowed to pass on some of their labor, transportation, processing or other cost increases, at least not immediately.

By holding down prices for processed foods while permitting the cost of raw farm produce to rise, the freeze has laid the groundwork for shortages later this year. Faced with soaring prices for feed, farmers killed baby chicks, sows and milk cows. Unable to earn a profit, meatpackers closed down, and food processors slowed production. Beef production could drop 2% this year; earlier it had been expected to rise 3.5%. Pork production is likely to dip by 3%, and output of broiler chickens is running 1.5% behind last year's pace. Says Don Paarlberg, chief economist of the Agriculture Department: "There will be fewer eggs, smaller supplies of fresh fruits and vegetables. Milk production will probably fall off, and there will certainly be fewer canned goods, less margarine and flour."

The comfortable agricultural surpluses that in the past kept American food prices relatively low compared to prices in the rest of the world may, in fact, be gone forever. According to the General Accounting Office, the $1 billion sale of U.S. grain to the Soviet Union last fall was by far the biggest cause in lifting the price of American wheat by 100%, to $3 a bushel, and led to increases in the cost of flour and bread. On top of that, the GAO reports, the Agriculture Department made things worse by paying $300 million in subsidies to keep the selling price to the Russians unrealistically low.

The plight of the economy is largely attributable to the Nixon Administration's free-spending efforts to lift prosperity before the election last year, and its failure to restrain the boom that it had created. Even Shultz concedes that fiscal and monetary policy was much too expansive in the past. Some economists argue that those mistakes are now being corrected. For example, Walter Heller, chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson, believes the Nixon Administration's fiscal and monetary policies are now just about right, and that the chances of real recession are less than 50-50.

Yet there is growing doubt that the President's present economic team, led by Shultz, CEA Chairman Herbert Stein and COLC Director John Dunlop, can deal effectively with the difficult problems ahead. Says Economist Pierre Rinfret, a Republican and an influential adviser to Nixon: "Shultz and Stein are incompetent. They are a disaster. All they have demonstrated is the ability to lurch from one short-term solution to another." The assessment is overly harsh, but it does reflect a wide frustration inside and outside the Administration with repeated failures to bring the economy into line. Phase IV could well be the Administration's last, best chance to restore public confidence in its ability to foster prosperity without inflation.

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